VC Takes Off in Brazil, But First, a Giant Leap of Faith

There’s no question that Brazil is quente. Just last Friday, it was announced that Accel Partners has made its fifth investment in Brazil, in Kekanto, a local review and search site. As Accel’s Andrew Braccia told the New York Times, his firm — which didn’t disclose the size of the funding — has seen “an acceleration of high-quality opportunities” in the country.

Still, while Brazil’s developing startup ecosystem has been attracting more attention by investors and the media alike, it’s not for the faint of heart. In fact, it’s entirely possible that investment in the country will prove to be little than a learning experience for American VCs.

So I gathered while chatting recently with Seth Zalkin, co-founder and managing partner of the Astor Group, a seven-year-old advisory firm that helps its clients raise capital, and sell and restructure businesses, among other things. Zalkin helped open Astor’s office in Rio de Janeiro in 2009 and has since seen an influx of VC firms trying to divine how best to enter the Brazilian market. But even while he’s busily pitching outsiders on the merits of his adopted country, he concedes that no one yet knows how long the road to riches might really be. Following is an edited transcript of our conversation:

I’d guess that many investors are still shying from Brazil because it has more burdensome tax and labor regulations than does the U.S. What’s the situation, loosely, and is it changing?

‘More burdensome’ is probably the biggest understatement you could make. The government has to make it easier for companies to come down here. Right now, it’s very expensive to have employees, for example. While in the U.S., companies pay 25 percent for fringe [benefits that include healthcare, retirement benefits, vacation, etc.] on top of what employees are making, in Brazil, employers pay roughly 70 percent on top of what employees are making. Why? For a whole host of reasons, including that you actually pay people 13 months for a year’s work; by law, everybody gets an extra month’s pay in December.

It’s also very difficult to fire people. You have to pay them for a while afterward. And it’s difficult to set up an entity to invest in, where in the U.S., you can do a corporation or LLC and move on. People in Brazil are still figuring it out.

How do you get past these myriad obstacles?

If you’re trying to make an investment, you have to think through the steps, but it’s possible to figure things out. I tell people when they are coming here that they have to be patient and committed, that they are going to have problems, and if the first time they have an issue they decide they aren’t going to make an investment, they probably shouldn’t be here.

In the meantime — and I say this knowing it’s early days — is there any proof that VC can produce returns in Brazil?

I think everybody is looking for the first big exit. But you’re seeing real traction and real dollars, with some companies getting big very quickly, and people actually making money. [Daily deals company] Peixe Urbano [which has raised an undisclosed amount from Benchmark Capital, General Atlantic, Tiger Global, and Monashees Capital, based in São Paulo] is making $300 million on an annual basis.

Brazil had 7.5 percent GDP growth last year; it has 200 million people who are buying stuff and using technology more and a growing middle class that doesn’t have just cell phones but smart phones. There’s great upside potential.

Are VCs still primarily interested in clones of American companies? It seems so from a distance.

The investors who come typically fall into two camps. Some see this is as a big market in and of itself. Others say, ‘I love this market if the entrepreneurs aren’t trying to prove new things’ but rather reproduce what’s worked elsewhere. They say, ‘It’s been proven in the U.S.; now we’re just going to leverage that asset by doing it in another country.’

But some of these models, like that of Groupon, aren’t looking like sure long-term bets, even in the U.S.

That’s true, though I think Groupon will do well here. I think there’s room for a couple of daily deals services.

And where’s the talent coming from? Locally?

It’s interesting. I lived in Miami for a bit before coming here, and I knew a bunch of brilliant Brazilians who went to Wharton and M.I.T and Harvard and who stayed in the U.S. because there was less opportunity here. But with the U.S.’s sagging economy, people are coming back, both to start companies and become mentors. It’s definitely deepening the bench.

Which VCs are you running into the most?

Accel is down here quite a bit. You see Bessemer Venture Partners. Flybridge has been here a fair amount. Redpoint Venture was here recently, and we’ll see them again next week. On any given week, we’re getting calls from investors saying, ‘We’re here. What have you got? Can you make some introductions for us?’

We’re also seeing more and more people who aren’t here for the first time but are coming every month or have [planted a flag already]. For some, it’s a one-man outpost. But BV Capital is starting an office here and I expect it to grow quickly. Atomico and General Atlantic Partners have full-scale shops here. We’re also seeing some really early-stage guys, like Thrive Capital out of New York.

Are you seeing many more private equity pros than VCs?

We are, but I see a lot more VCs than in past years, and I see senior management versus younger players, which is something I’ve been very surprised by.

What are aspects in which the culture is different? Are there routine gathering spots for entrepreneurs and VCs in Rio, for example?

No, the startup culture is still very fragmented. I’ve been living here for a year and coming on a regular basis for a few years. In Silicon Valley, it’s, ‘Let’s go out and network and do things together.’ But that’s the antithesis of the old-school Brazilian culture. By and large, the culture is: ‘We’ve been here for a long time. We have our families. We belong to our clubs. And we’re not going to network and meet new businesspeople.’

That doesn’t sound particularly conducive to the needs of foreign investors.

It isn’t, but I’m seeing remarkable change. These young entrepreneurs who grew up in the States, or even grew up in Brazil,  have adopted a Silicon Valley type mentality, so you’re seeing people in São Paulo and Rio who are [upending traditional culture]. They really want to build something. It’s how I imagine Silicon Valley might have looked 40 years ago. People get that it’s a great time to make your mark here.